Economists had expected a decline of 0.3 percent, according to a survey conducted by CBS.MarketWatch.com.

January's decline was revised to a drop of 0.3 percent from an earlier estimated decrease of 0.6 percent.

Capacity utilization fell to 79.4 percent -- the lowest in nine years and 2.7 percentage points below its average for the past 33 years.

The report shows manufacturing remains in a recession with few areas of strength. Analysts expect the Federal Reserve to lower interest rates by as much as 75 basis points at next Tuesday's much-anticipated policy meeting.

Fed officials have said the economic slowdown is merely an inventory correction caused by excessive optimism about sales. When demand failed to materialize, producers were forced to cut production to work down inventories.

Economists believe the inventories could be worked through by summer.

High-tech bucks trend, but barely

Within manufacturing, only high-tech industries like computers, semiconductors and communications equipment managed to rise. Output rose 0.8 percent in high-tech, a sector that had grown more than 40 percent in the past year.

Earlier, the Commerce Department said housing starts were unchanged in February at a 1.65 million pace, pointing to greater strength in the U.S. housing market than many observers believed. Separately, the producer price index for February rose 0.1 percent with core inflation falling 0.3 percent, the Labor Department said. See full story.

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